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Knutson (Logue) v. Kutson (3/5/99), 573 P 2d 596
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Notice: This opinion is subject to correction before publication in
the Pacific Reporter. Readers are requested to bring errors to the
attention of the Clerk of the Appellate Courts, 303 K Street,
Anchorage, Alaska 99501, phone (907) 264-0608, fax (907) 264-0878.
THE SUPREME COURT OF THE STATE OF ALASKA
LESLEY ANN KNUTSON (LOGUE), )
) Supreme Court No. S-8246
Appellant, )
) Superior Court No.
v. ) 3AN-87-11349 CI
)
RANDY THOMAS KNUTSON, ) O P I N I O N
)
Appellee. ) [No. 5089 - March 5, 1999]
______________________________)
Appeal from the Superior Court of the State of
Alaska, Third Judicial District, Anchorage,
Sen K. Tan, Judge.
Appearances: Susan H. Carse, Bauer and Carse,
Anchorage, for Appellant. David W. Baranow,
Law Offices of David Baranow, Anchorage, for
Appellee.
Before: Matthews, Chief Justice, Compton,
Eastaugh, Fabe, and Bryner, Justices.
EASTAUGH, Justice.
1. INTRODUCTION
When Randy and Lesley Knutson dissolved their marriage
and divided their property in 1988, they agreed to postpone selling
the marital residence until its market value rose. In 1997 Randy
sought judicial authority to buy out Lesley's share in the still-
unsold house. The superior court found the parties' agreement to
be ambiguous; interpreting the agreement, it ordered Randy to pay
Lesley $4,301.50 to buy out her equity interest. The superior
court correctly found that the agreement required division of the
parties' equity, but it was error to implicitly find that the
parties did not intend to share the benefits of the post-
dissolution reduction of their mortgage debt. We remand for
recalculation of the value of Lesley's interest to correct that
error. It was also error to fail to account for mortgage
assistance Randy received that increased the parties' mortgage debt
by about $7,900. But it was not error to credit Randy with twenty
percent of his post-dissolution home improvement expenses given
evidence that the improvements might maintain or increase the value
of the house.
2. FACTS AND PROCEEDINGS
Randy Thomas Knutson and Lesley Ann Knutson (now Logue)
married in 1974. In late 1987 they petitioned for dissolution of
their marriage. Neither was represented by counsel.
Their petition incorporated an amended agreement
concerning disposition of their Eagle River marital residence.
They had purchased it for $123,440. When they petitioned for
dissolution, its market value was about $104,700, and the mortgage
balance was about $117,000. Because the house then had a "negative
equity,"they decided to wait for the housing market to improve
before selling it. Their amended dissolution agreement added the
following term: "Husband will occupy the house and pay its mortgage
and utilities until it sells, whereupon both parties shall equally
split either the profits or debt." They also agreed that Randy
would receive all household furniture. Superior Court Judge Peter
A. Michalski granted the petition in early 1988.
With Lesley's approval, Randy reorganized the mortgage
debt in January 1989. The reorganization increased the term from
sixteen to thirty years, at the original interest rate. At the
same time Randy also received a twenty-four-month subsidy of his
mortgage payments through a homeowner's assistance plan. The
subsidy added $6,615.67 to the mortgage balance and was to be
amortized over the life of the reorganized loan. The
reorganization also paid the $1,293.25 January mortgage payment,
and increased the new mortgage balance by that amount. Lesley
later testified that she had not known of or agreed to the subsidy;
Randy did not claim that she had. Lesley remained jointly liable
with Randy on the reorganized mortgage. As a result of the 1989
reorganization, the mortgage balance rose from $112,931.81 to
$121,698.02.
Randy tried to refinance the mortgage in 1994 to take
advantage of lower interest rates. According to Randy, Lesley
withheld her approval, and Randy could not refinance. Randy
contends that he lost the chance to save more than $80,000 over the
term of the loan because Lesley blocked the refinancing, although
no admissible evidence established that her alleged refusal caused
measurable financial loss. Lesley denied that she had refused to
cooperate.
In January 1997 Randy moved under Alaska Civil Rule 60(b)
for relief from the property settlement agreement incorporated into
the dissolution decree; he alleged that he feared Lesley would
stymie all future refinancing efforts. He asked the court to
modify the dissolution decree so that he could "buy out"Lesley's
interest in the house. Lesley did not object to a buyout, but
disagreed with Randy's proposed method for calculating the buyout
price.
The parties exchanged memoranda and testified at a
hearing before Superior Court Judge Sen K. Tan. They offered
conflicting interpretations of their agreement. Randy contended
that the parties intended to divide equally any "profit,"which he
defined as the value of the house at the time of sale minus the
cost of sale, the original purchase price, the original closing
costs, the costs of pre-dissolution improvements, and the increased
value he attributed to post-dissolution improvements. Randy
calculated that a hypothetical sale of the house at fair market
value in 1997 would result in a loss of $9,374.17. 1 Although his
motion did not expressly say so, it implied that Lesley should pay
him for half of this hypothetical loss.
Lesley contended that the parties intended to divide
equally the "equity"in the property, which she defined as the
value of the house at the time of the buyout ($127,500) less the
mortgage balance then owed ($113,043.77). She concluded that her
equity interest was half of $14,456.23. Lesley also argued that
Randy's 1989 mortgage reorganization entitled her to a credit of
$3,954.46, on her theory that Randy had reduced the parties' equity
in the house by obtaining the mortgage subsidy under the state
homeowner's assistance plan and the payment of the January 1989
mortgage installment. She contended that Randy's proposed buyout
did not warrant Rule 60(b) relief, but that the court simply needed
to determine the intent of the parties at the time of the
dissolution agreement and make findings as to each party's
financial interest in the home.
The superior court declined to grant Rule 60(b) relief to
Randy, but "clarif[ied] the ambiguous terms of the property
settlement." It rejected each party's interpretation of the
agreement; it stated that Randy's calculation deprived Lesley of
her share of the equity in the house at the time of dissolution,
whereas Lesley's calculation allowed her to "reap a windfall"from
Randy's contributions to the equity in the form of post-dissolution
improvements and mortgage payments. To determine Lesley's equity
interest, the court calculated what part of the increased value was
attributable to market conditions, and what part was attributable
to Randy's post-dissolution contributions. The court therefore
made the following calculation:
Sale price $127,500.00
Mortgage debt at time of dissolution -$117,000.00
Post-dissolution addition to value -$ 1,897.00
$ 8,603.00
The court concluded from this calculation that $8,603 of
the market value was attributable to equity jointly contributed
before the dissolution and to the jointly shared increase in value
due to improved market conditions. The court found that the
remaining increases in equity resulted from Randy's post-
dissolution improvements and mortgage payments. The court ordered
Randy to pay Lesley half of the increase attributable to the
agreement and pre-dissolution equity contribution, $4,301.50, to
obtain her interest in the property.
Lesley appeals.
3. DISCUSSION
1. Standard of Review
The interpretation of the parties' dissolution agreement
is a question of law. 2 We exercise our independent judgment in
reviewing questions of law. 3
We review factual findings for clear error. 4 It is the
function of the trial court, not of this court, to judge witnesses'
credibility and to weigh conflicting evidence. 5
2. Did the Superior Court Have Authority to Interpret the
Agreement?
Lesley argues that the superior court had no authority to
modify the decree by changing the terms of the parties' agreement.
Lesley agreed in the superior court and also agrees on appeal that
the superior court had authority to interpret the agreement to
determine the parties' contracting intentions. Her argument about
the court's authority really translates into a claim that the
superior court interpreted the parties' intentions in a way that
modified their agreement, even though the superior court denied
Randy's motion for Rule 60(b) relief.
The approach adopted by the superior court --
interpreting the agreement and determining the parties' contracting
intentions -- was legally appropriate, acceptable to both parties,
and factually warranted. Our inquiry therefore turns to the
question whether the court erred in interpreting the agreement and
determining and enforcing the parties' intentions.
3. Was It Error to Calculate Equity without Including Post-
Dissolution Mortgage Reductions?
Lesley argues that her interest in the house was worth
$11,182.57, not $4,301.50 as found by the superior court. She
attributes the difference to several alleged errors. Two of these
alleged errors -- giving her no share of post-dissolution
reductions in the mortgage balance and failing to divide Randy's
"equity withdrawal"-- arise directly out of the way the superior
court calculated the parties' equitable interests.
A financial agreement entered into in connection with a
dissolution proceeding is a contract subject to interpretation
under contract principles. 6 "The goal in interpreting a contract
is to give effect to the reasonable expectations of the parties.
These expectations are determined by reviewing the language of any
disputed provisions, other provisions, relevant extrinsic evidence,
and case law interpreting similar provisions."7
The superior court first determined that the parties'
ambiguous agreement to split the "profits or debt"was intended to
require division of their "equity."8 It found that the parties
intended to split increases in the home's market value, but that
the agreement did not address equity increases attributable to
reduction of the mortgage and to improvements. Reasoning that
allowing Lesley to share in post-dissolution equity increases not
attributable to the improving real estate market would give her a
windfall, the court subtracted the mortgage debt measured at the
time of the 1988 dissolution from the market value measured at the
time of the 1997 buyout, and (after a $1,897 adjustment discussed
in Part III.E) split the $8,603 difference in half to obtain
Lesley's equitable share.
Lesley argues that it was error to subtract the 1988
mortgage balance, instead of the 1997 balance, from the 1997 sale
price. We agree. Because the parties agreed to delay selling the
house to allow its market value to rise and agreed to divide the
equity when the house finally sold, the time of sale is
presumptively the correct time to calculate the mortgage debt. 9
The record in this case does not support use of a different date
for measuring the mortgage debt on this marital property.
The superior court's concern about a potential windfall
led it to use the 1988 balance. Its concern was based on its
finding that the agreement did not address equity increases
resulting from post-dissolution mortgage payments and improvements.
Given the presumption that the equity in marital property
is derived by comparing the market value and the debt as they stand
on the same date, an agreement's total failure to address this
topic would not justify use of one date to measure the market value
and another to measure the debt. And, although the evidence here
is sparse on this central issue, we conclude that the existing
evidence is inconsistent with any implicit finding that the parties
affirmatively intended to exempt Lesley from sharing in post-
dissolution mortgage reductions.
The agreement specified that Randy "will occupy the house
and pay its mortgage and utilities until it sells . . . ." It was
undisputed that Lesley no longer lived in the house. Lesley
testified that she had understood the agreement to require that she
and Randy would split equally the difference between the sale price
and whatever was then owed on it. Because the agreement expressly
required Randy to make the post-dissolution mortgage payments,
Lesley's testimony was inconsistent with giving Randy all the
credit for post-dissolution reductions in the mortgage balance.
She testified that she believed Randy received the benefit of
living in the house in exchange for making the mortgage payments.
She also testified that if there had been a loss, she had expected
to share that loss equally. In response to the court's questions,
she and Randy both testified that when they entered into the
agreement there was no time limit on how long it would take to sell
the house. Randy testified that in agreeing to make the mortgage
payments he understood he would live in the house. He also
testified that he did not see that making the mortgage payments was
a trade-off for getting to stay in the house. He did not testify
that he understood that the parties had agreed the equity would be
calculated using the 1988 mortgage balance, or that they had agreed
Lesley would not participate in post-dissolution equity increases
resulting from mortgage payments. Although Randy objected in the
superior court that any evidence by the parties about their
contracting intentions violated the parol evidence rule, he does
not argue on appeal that Lesley's testimony was inadmissible.
Because the agreement seems to balance the benefit of
occupying the home against the cost of the mortgage payments, it
seems highly improbable that the parties also silently agreed that
Randy would also receive all the benefit of mortgage reductions
resulting from those payments when their house eventually sold.
There is no evidence in the record that the mortgage payments
exceeded the monthly rental value of the house. There is no
dispute on appeal that the house had substantial value ($127,500).
The record establishes that this was a two-bedroom, two-bathroom,
1,546 square-foot house, with a two-car garage. There was no
evidence that its condition at the time of dissolution
significantly diminished its rental value. The evidence therefore
does not permit us to find as a matter of law that the house had
insignificant rental value and that Randy consequently derived no
benefit from living there, or that the mortgage payments materially
exceeded the monthly payments required to rent comparable property.
We have recognized that living in the marital residence after
dissolution or divorce has value. 10 The record justifies an
assumption that the benefit of living in the home was not
materially less than the cost of the mortgage payments.
Randy moved for relief and proposed a method of valuation
that gave him credit for equity increases resulting from his post-
dissolution mortgage payments. Although it might be appropriate to
conclude that he failed to carry his burden of showing that the
benefit the agreement gave him (the right to continue living in the
home) was less than the mortgage payments, it is not necessary to
rely on a burden of proof analysis. Nothing in the agreement
justifies an interpretation that denies Lesley participation in
these debt reductions. The parties apparently intended to deal
comprehensively in an integrated fashion in dividing their
property. Lesley relinquished any claim to Randy's military
retirement, but continued to share the contingent liability under
the mortgage, including exposure to half the loss if the house was
sold before its market value exceeded the balance on the debt.
Randy argues that it would be unfair to deny the credit
because he claims he paid every expense, cost, tax obligation, and
premium for the property. His supporting record citations do not
address premiums or tax payments, but assuming Randy paid all such
expenses after the dissolution, he also received the benefit of
living in the home, as well as the benefit of taking annual income
tax deductions for mortgage interest and property tax payments.
Splitting post-dissolution reductions in the loan balance
roughly approximates what would have happened if Randy had paid
half the rental value of this jointly owned property monthly to
Lesley and they had each paid half the monthly mortgage payment.
The superior court found that denying the credit to Randy would
give Lesley a "windfall"and noted what would happen if the
mortgage were completely paid off. It found that Lesley's
"position would entitle her to half of $127,500." We do not see
that result as untoward under these circumstances.
Given ambiguity, a court must give effect to the
reasonable expectations of the parties as determined by reviewing
the language of any disputed provisions, other provisions, relevant
extrinsic evidence, and case law interpreting similar provisions. 11
The phrase "profits or debt"is ambiguous, and the superior court
correctly interpreted that phrase to mean "equity." But the
remainder of the agreement and the extrinsic evidence gave no basis
for calculating equity in the way the court did, and we conclude
that it was clear error to find that the parties intended that only
Randy would be credited with this equity increase.
Randy seems to argue that AS 25.24.160(a)(4), Rule
60(b)(5), and Foster v. Foster, 684 P.2d 869 (Alaska 1984) (relying
on Rule 60(b)(6)), provide an alternative basis for affirming. 12
He has not cross-appealed or argued that it was error to deny his
motion for Rule 60(b)(5) relief. We decline to rely on this
alternative basis to affirm. There is no indication extraordinary
circumstances justified relief that effectively would have given
Randy rent-free occupancy of the house for nine years; the delay in
sale of the home and Lesley's alleged refusal in 1994 to cooperate
with a potentially beneficial refinancing do not appear to be
extraordinary circumstances justifying relief under Rule 60(b)(6).
Nor does the record establish that a fundamental, underlying
assumption of the dissolution agreement had been destroyed. 13 Under
these circumstances, we are not willing to grant extraordinary
relief which the superior court chose to deny.
4. Was It Error Not to Require Randy to Reimburse Lesley for
Randy's "Equity Withdrawal"?
The mortgage payment subsidy Randy obtained under the
Alaska homeowner's assistance program in 1989 subsidized Randy's
mortgage payments for twenty-four months and paid his January 1989
mortgage installment. The total cost, $7,908.92, was added to the
parties' mortgage balance and amortized over the remaining thirty
years of the loan. Lesley argues that the subsidy was an "equity
withdrawal"by Randy; she contends that the superior court should
have ordered Randy to share the equity withdrawal by paying Lesley
$3,954.46, half the amount of the withdrawal.
The superior court did not expressly discuss this issue,
no doubt because it recognized that the credit Lesley sought was
inconsistent with the court's decision that it should look to the
debt owing at the time of dissolution. It was not necessary for it
to reach this issue because the court used the 1988 mortgage to
calculate the parties' share in the equity. But because we have
concluded that it was error not to rely on the 1997 mortgage
balance, we must consider the issue.
Randy acknowledges that he received a "front-loaded
benefit of a slightly reduced mortgage payment." But he argues, in
effect, that he received no real benefit because the cost was
amortized over the remaining life of the loan and because he
incurred a far greater obligation (with interest).
We disagree with his characterization. The subsidies
reduced Randy's monthly mortgage payments for twenty-four months by
an average of more than $200 and completely paid the January 1989
installment of nearly $1,300. The assistance and the January 1989
payment added $7,908.92 to the balance due on the parties' joint
debt. Randy thus unilaterally received the benefit of that
assistance in 1989, and in doing so unilaterally reduced the
parties' equity in the marital home. On remand, the credit sought
by Lesley must be granted to compensate for the benefit received by
Randy.
5. Was It Error to Subtract $1,897.56 for Value Added by
Randy's Post-dissolution Improvements?
Randy claimed that he had spent at least $9,487.80 in
post-dissolution improvements and asserted that his investment
added $1,897.56, twenty percent of the expense, to the house's
value. The superior court gave Randy credit for $1,897, as a
"post-dissolution addition to value (20% of cost of improvement)."
It subtracted this amount from the house's equity to prevent
Lesley from benefitting from Randy's post-dissolution
contributions. Lesley complains that no evidence substantiates the
court's finding that the improvements added $1,897.56 to the market
value.
Randy provided evidence of his expenses, and a real
estate expert testified that improvements could help a house retain
value and could also add value to a house. The expert did not
express any opinion as to whether Randy's particular improvements
added $1,897.56 or any other amount to the value of this house.
Because the superior court had before it evidence that
the improvements could maintain or increase the house's existing
value, it was not clear error for the court to award a relatively
modest twenty percent credit for Randy's expenses. We therefore
affirm this credit.
4. CONCLUSION
Because it was not error to award credit for the home
improvement expenses, we AFFIRM this element of the award. Because
it was error to look to the debt at the time of dissolution rather
than at the time of sale and to fail to divide the "equity
withdrawal,"we REVERSE and REMAND for recalculation of the amount
Randy must pay Lesley to buy out her interest in the marital home.
Footnotes
1 Randy's motion proposed the following valuation:
Sale price $127,500.00
Post-dissolution addition to value -$ 1,897.56
Parties' initial purchase price -$122,000.00
Parties' initial closing costs -$ 1,438.24
Parties' costs of improvements -$ 11,538.37
($ 9,374.17)
2 See Van Alfen v. Van Alfen, 909 P.2d 1075, 1077 n.4
(Alaska 1996) (citing Johnson v. Schaub, 867 P.2d 812, 818 n.12
(Alaska 1994) (contract interpretation is generally a question of
law)).
3 See id. (citing Beesley v. Van Doren, 873 P.2d 1280, 1281
(Alaska 1994)).
4 See Harrelson v. Harrelson, 932 P.2d 247, 252 n.6 (Alaska
1997) (citing State, Dep't of Revenue v. Merriouns, 894 P.2d 623,
625 (Alaska 1995)).
5 See Parker v. Northern Mixing Co., 756 P.2d 881, 892
(Alaska 1988).
6 See Keffer v. Keffer, 852 P.2d 394, 397 (Alaska 1993);
see also Bond v. Bond, 590 N.E.2d 348, 349-50 (Ohio App. 1990)
("Where there is good faith confusion over the requirements of the
dissolution decree, a court has the power to enforce its decree, to
hear the matter, clarify the confusion, and resolve the dispute.")
(citations omitted).
7 Keffer, 852 P.2d at 397 (citing Jensen v. Ramras, 792
P.2d 668, 670 (Alaska 1990)).
8 "'A contract is ambiguous only if, taken as a whole, it
is reasonably subject to differing interpretations.'" Id. at 397
(quoting State v. Fairbanks N. Star Borough Sch. Dist., 621 P.2d
1329, 1331 n.4 (Alaska 1981)).
9 See Black's Law Dictionary 540 (6th ed. 1990) (defining
"equity"as the "[v]alue of property . . . over and above the
indebtedness against it (e.g., market value of house minus
mortgage),"and as the "difference between the fair market value
and debt in property"); see also Webster's II New Riverside
University Dictionary 440 (1994) (defining "equity"as "[t]he money
value of a property beyond any mortgage or liabilities existing on
it").
10 See Rodriguez v. Rodriguez, 908 P.2d 1007, 1013 (Alaska
1995) ("[W]here the use of marital property after separation
effectively excludes the other spouse, the rules of cotenancy
require payment to the marital estate of the fair market rental
value for use of the property.") (citing Wood v. Collins, 812 P.2d
951, 958 (Alaska 1991)).
11 See Keffer, 852 P.2d at 397.
12 See Wood v. Collins, 812 P.2d 951, 959 (Alaska 1991)
(affirming relief that was proper under Rule 60(b) even though
superior court erroneously "called the motion one for
reconsideration"). "We may affirm the superior court on any basis
appearing in the record." Far North Sanitation, Inc. v. Alaska
Pub. Util. Comm'n, 825 P.2d 867, 869 n.2 (Alaska 1992)(citing Sea
Lion Corp. v. Air Logistics of Alaska, Inc., 787 P.2d 109, 116
(Alaska 1990)).
13 See Lowe v. Lowe, 817 P.2d 453, 458-59 (Alaska 1991);
Schofield v. Schofield, 777 P.2d 197, 202 (Alaska 1989); Foster v.
Foster, 684 P.2d 869, 872 (Alaska 1984).
-17- 5089
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